My 2014 Market Forecast

“Opinion is ultimately determined by the feelings, and not by the intellect.” – Herbert Spencer

S&P 500 Year End Target:???

10 Year Treasury Yield Year End Target:???

Gold Year End Price Target: $1,017 (just kidding, still no clue)

I could offer plenty of well researched and intelligent sounding reasons for a forecast on the markets. I could back them up with hard data and expert opinions. But at the end of the day, these forecasts will be worthless to you and to me.

It’s already started, but in the coming weeks you will hear phases like expect the unexpected, more uncertainty in 2014, it’s setting up to be a stockpicker’s market and I see an 8-10% return for the year ahead.

Don’t listen to these types of forecasts. They are wild guesses at best.

CXO Advisory Group conducted a comprehensive research study that looked at over 6,500 forecasts on the U.S. stock market by 68 experts from 2005-2012.

These are some of the most well-known investment strategists, portfolio managers and research analysts on Wall Street. These people are regularly trotted out on CNBC to make their market calls.

So how did these famous experts do with their predictions? Not so great.

They we’re correct around 47% of the time. You’d be better off flipping a coin to make your predictions than by taking the collective wisdom of Wall Street’s best and brightest.

CXO laid out some reasons for their lack of foresight. Many times their motivation is not necessarily for making accurate forecasts. To get noticed you must make a splash and that means making statements about a crash or a bubble.

It makes for better TV ratings to talk about the coming crash or the finding the next Google than it is to extoll the virtues of staying the course with your investment plan.

Many of these forecasters aren’t really held accountable for their predictions. They say something outrageous one week and try another route the next if it turns out they were wrong.

Market forecasters also exhibit the same behavioral biases that affect all investors (herd mentality, outcome bias, confirmation bias, the illusion of control, anchoring, etc.). The only difference is that their biases are magnified by the fact that they are intelligent people that can get caught up in their own intelligence by becoming overconfident.

Probably to worst behavioral quirk that you see with Wall Street analysts and strategists is the recency bias. As Jason Zweig pointed out in Your Money and Your Brainwhen our brain sees something happen two times in a row we unconsciously and automatically expect a 3rd repetition.

This means that as stocks rise, investors expect them to keep rising. As interest rates fall, most think they will continue on that same path. When a company has a bad quarter it must mean it’s time to downgrade them to a sell. It’s very difficult to go against the grain on Wall Street.

As Buffett once said, “A pack of lemmings looks like a group of rugged individualists compared with Wall Street when it gets a concept in its teeth.”

This is not to say that everyone if always wrong all the time, but just take all of the predictions you hear with a grain of salt.

The people that end up being right usually have a healthy dose of luck involved. As Michael Mauboussin pointed out in The Success Equation, it’s very difficult to separate luck from skill in the investment profession.

I’m not suggesting that you don’t think about the future at all when it comes to the markets. You have to think long term to set your asset allocation and risk profile for your portfolio.

Making a long term forecast of stock and bond returns to determine your specific asset mix is perfectly rational.

This will allow you to set reasonable saving goals. Then as the actual results come in you can adjust both your expectations and how much you are saving and investing to reflect reality.

Understanding historical performance and how the various investment classes have performed over multiple cycles is a great way to gain the correct long term perspective on the markets.

You might not be able to make that forecast with precision, but no one can. You just need to be in the ballpark. Accuracy (within a reasonable range) is much more important than precision (being exactly right) when it comes to your finances.

Investing is not so much about your actions as it is about your reactions. So even though you can’t expect to predict the movements of the markets over the next year you can forecast your own behavior. Come up with a behavioral forecast instead of a market forecast.

Here are a few things you can control with your behavioral forecast:

How much money you expect to save & invest.

What you will do if stocks fall by 10%, 20%, 30%, etc.

What you will do if stocks rise by 10%, 20%, 30%, etc.

What you will do if interest rates rise or fall significantly.

When you make your purchases and sales.

How much risk you are willing and able to take.

A behavioral forecast requires no spreadsheets, expert opinions or market data. You just have to know yourself and how you react to different situations.

So don’t try to forecast the moves of the markets over the next year. No one knows what’s going to happen and it shouldn’t matter all that much to you if you have a long time horizon.

More from my site

BEN CARLSON, CFA

A Wealth of Common Sense is a blog that focuses on wealth management, investments, financial markets and investor psychology. I manage portfolios for institutions and individuals at Ritholtz Wealth Management. More about me here.

Get Some Common Sense

Sign up for my newsletter

Email:

Great news, we've signed you up.Sorry, we weren't able to sign you up. Please check your details, and try again.